Thursday, February 12, 2015

The US Needs the Next Crash Sooner than Later (Video)

USAWatchdog’s Greg Hunter spoke with Peter Schiff this week. They discussed the intricate problems of Europe and Greece, the phony economic recovery in the United States, and how investors can protect themselves when wars break out. Peter also responded to the ongoing negative sentiment of gold bears who continue to predict a lower gold price despite evidence to the contrary.

Highlights from Peter’s interview:

Greg Hunter: The headlines [concerning Greece] are all over the map. They’re going to get a six month extension. The Greeks are looking like they’re not going to do anything with the bailout. They’re making noises that they’re going to get help from Russia and China. One European official said it was berserk and there was no plan. What’s going on?Peter Schiff: They had to cheat their way to get into the euro. They had to lie and cook the books with the help of maybe Goldman Sachs, but they managed to get in. Now they’re holding everybody else hostage. It’s unfortunate that they’re even part of this experiment, although I didn’t hold out a lot of hope for it from its inception…
First of all, you’ve got this group of politicians that are freshly elected. They rode a wave of populism. They promised to get tough with Europe, and they got to put on a show for the electorate… At the end of the day, I think Greece has little choice. If they follow through with their ‘my way or the highway, we’re going to leave the eurozone’, I think it would be a disaster in Greece. I don’t think the Greek politicians want to go through that…
I think for Europe, and Germany in particular, there’s a lot at stake here. People always talk about, ‘What about Spain or Portugal or Italy? What might they do if Greece leaves?’ I think Germany is more worried about what they may do if Greece wins some incredible concessions, because now everybody is going to want to be treated the same way. I think if they’re tough with Greece, they have a better chance of toeing everybody else into line.
If Greece does leave the euro, and it collapses in runaway inflation and debt, then it could be a poster child for what could happen. It could scare the rest of Europeans straight and do the reforms that the Greeks have been reluctant to agree to…
I think nations should be allowed to default. I don’t think they should be bailed out by the central bank. I don’t think the central bank should be monetizing government debt. I don’t think the Italian government should borrow at the same rate of interest as the German government or the Spanish government or the French government. I think governments should borrow based on their own criteria. US states, municipalities, some issue debt at higher interest rates than others because they’re deemed for creditworthy by the markets…

Greg: If Greece does [abandon the euro], Bernie Sanders says the US should bailout Greece with US dollars. If there’s no deal, could Greece implode the European Union and cause a daisy chain of derivative default?Peter: I doubt that Greece leaving would set off that chain. In fact, a lot of the bonds that used to be owned by the banks are now owned by hedge funds. I think the losses now would not be as badly felt in the banking sector as they would have been several years ago…
The question is what would an independent Greece do? Once it’s left to its own devices, yes, there’s going to be a complete collapse if they go back to the drachma. You’re going to see a dramatic decline in the purchasing power of the drachma. Prices will rise dramatically. Real wages will fall. The economy will be a disaster, especially if the Greek government follows a Marxist playbook… Obviously that’s not going to work. They would be forced to a more market oriented approach. Imagine if Greece were to become a tax haven?
I’ve always thought that if the Greeks wanted to get something from Europe, threaten to abolish the corporate income tax. Threaten to abolish the personal income tax for any European businesses that relocate to Greece. That could scare the hell out of some of these higher tax nations… But they’re probably not even thinking along those lines…

Greg: You’re saying other things could break down Europe. Like what?Peter: What if Germany wants out? Everybody is worried about the weaker countries wanting out. What about the stronger countries? The Germans’ tradition is a sound currency. The euro was sold to the Germans as the new deutschmark, not the new lira, not the new franc or peseta… You’ve got this situation where everybody is encouraged to have debt, because they push the problem off on somebody else. You have an incredible moral hazard inherent in the way this system has been designed. They need to deal with these problems… Otherwise, ultimately it will lead to the demise of the euro. But I am even more concerned with the problems of the dollar…
We have even more advanced problems in America with our currency than in Europe with the euro – the degree of the debt that we have, the degree to which we’re dependent on artificially low interest rates… massive trade deficits that we have chronically year after year… These are growing problems that are ultimately going to lead to a US dollar crisis… But our creditors haven’t figured this out yet, so they’re content to clip coupons on low yielding US debt. But they’re patience is going to run out.
We’re talking about Greece. The real problems in Greece began when interest rates rose. Greece had a lot of debt before interest rates went up. But while rates were very low in Greece, it wasn’t perceived as a problem, because the Greeks could pay the interest. They couldn’t pay the principle, but at least they could pretend to afford it by paying the interest. That’s all the United States does. We have no hope of repaying the principle, but at 1% or 0% we can at least pay the interest… We cannot afford higher rates of interest.

Greg: Which brings us to gold. A lot of people out there are saying gold is going lower. Gold is going $700, $650. Of course, you’re here with SchiffGold… Why are they wrong?Peter: People have been very negative on gold for years. In fact, the entire bull market that really began in 1999, 2000 when gold was below $300. It went as high as $1900. People were bearish the whole way up, so bearishness on gold is not new. Some of the bears have become more emboldened , because after so many years of being wrong, they were finally right. We finally had a couple of down years. But gold has not fallen nearly as much as the gold bears have expected. In fact, last year gold was only marginally lower in dollars. But in terms of just about every other currency, gold did very, very well. Up 5, 10, 20% or more. In fact, gold outperformed almost all the stock markets in the world in 2014…
The skeptics have constantly overestimated how much gold has declined. And they’re still very negative on the price of gold despite the fact that it’s now really been rising for well over a year in terms of foreign currencies, and it hasn’t been falling in terms of dollars. You can really see that skepticism reflected in the price of gold stocks, [which] were really sold down based on the idea that gold prices would keep falling. In fact, it hasn’t happened. Year to date, gold stocks are outperforming maybe any other segment of the market as these real bearish forecasts about the price of gold are not panning out.

Greg: People are saying that if you combine higher interest rates with the global economy slowing down, gold is going to take a hit. What say you?Peter: I don’t really think interest rates are going to rise very much. They may not rise at all. One of the reasons the Fed has been talking so much about raising interest rates, is because they don’t want to do it. If they really wanted to raise rates, they would have done it a long time ago… I think the Fed doesn’t want people to realize that it can’t raise rates… Now people really expect them to raise rates…
I wouldn’t bet that we’re going to get a rate hike this year. But it is possible that we get some trivial 10, 15, 25 basis point hike and that’s all they do… It’s really not substantive, it’s just psychological. But if the Fed even makes a small rate increase, what will that set in motion? Will the market now begin to anticipate more rate hikes faster? …

Greg: The head of Gallup openly worried about being able to make it home after criticizing the unemployment numbers that are bogus. We keep hearing this recovery story, and then we keep hearing stories behind it that say there is no recovery. What do we have? Do we have a recovery that will end up raising rates? Or do we have a bogus recovery?Peter: We had a recovery in the stock market. The prices went up. We had a recovery in the real estate market, if you’re going to look at real estate prices. But we didn’t have an economic recovery. Did we recover the jobs that we lost? No. We recovered jobs, but not the ones that we lost. We lost higher paying, full time jobs and we gained lower paying, part time jobs. We lost manufacturing jobs. We gained service sector jobs… The average American has a lower standard of living…
This is a big transformation from a full time economy to a part time economy. As businesses try to survive Obamacare, they try to restructure the way they pay people. This is what the president has decreed. It’s ironic that he’s done something so bad that it results in a lower unemployment rate. It results in lots of jobs being created. If you’re going to replace full-time workers with part-time workers, the numbers are that you’re going to have more jobs. You’re going to have more people to do the work and each one is going to work fewer hours…

Greg: Anyone who manages a lot of money worries about war. You have Angela Merkel, lead of Germany, and the leader of France flying – to me, frantically – to Kiev and Moscow. They went to Putin. Putin didn’t come to them. They appear to be between the US and Russia in what might end up being a pretty nasty war in Ukraine. France doesn’t want it. Germany doesn’t want it… Is that one of your fears? The war fear in Ukraine? You can tack on ISIS in the middle east.Peter: I don’t spend that much time worrying about wars. Obviously they can happen, and when they do it’s destructive in general. Wars are expensive. Not only in human lives and suffering, but they’re expensive to finance. They divert resources from peace time purposes to war time purposes…
I hope we can avoid some of those conflicts. I can’t necessarily invest around them, because I don’t necessarily know how to anticipate them. But to the extent that there is war, they’re historically financed by inflation. Government print money to pay for wars, rather than raise taxes. At least, that’s the modern way to do it. So it’s good for precious metals. It’s good for hard assets. Oil prices have come down. One way to get oil prices back up is to have a war, particularly if it involves oil producers…

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Latest news, comments and media appearances of Peter David Schiff - the CEO and Chief Global Strategist of Euro Pacific Capital and CEO of Euro Pacific Precious Metals, LLC, a silver and gold dealer. His insights about the US and global economy, fiscal cliff, US dollar, precious metals and the Fed.